US: Downward Momentum Easing - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has
rebounded modestly in the Asian trading session bringing at least a
temporary pause to the period of uninterrupted selling pressure which
followed Fed Chair Yellen’s dovish speech at the end of last month.

Key Quotes

“US
yields have started to creep higher again this week supported primarily
by the ongoing improvement in global investor risk sentiment as evident
by further gains for the US equity market overnight which resulted in
it closing at its highest level for the calendar year. The latest
economic data from China and rebound in commodity prices are boosting
investor confidence that policy stimulus is beginning to support
economic growth in the near-term.

If external risks to the US
economy continue to ease including the recent weakening of the US
dollar, it should provide some reassurance to the Fed potentially making
it more comfortable to resume gradual rate hikes from the middle of
this year. The Fed would also like to see evidence that US economic
growth is strengthening in the coming quarters after weak growth around
the turn of the calendar year.

The release yesterday of the
latest retail sales report for March provided further evidence that
personal consumption growth has likely softened in Q1. The early timing
of Easter likely played a role in dampening core retail sales growth in
March although the trend has clearly softened in recent quarters as US
households have become more cautious and built up savings.

We
are assuming that economic growth will begin to pick up in the coming
quarters offering support for the US dollar although more conclusive
evidence will be required to sustain the tentative US dollar rebound. We
are more confident that inflation pressures will remain firmer keeping
pressure on the Fed to raise rates further. The recent uptrend in core
(CPI) inflation is clear rising from 1.6% to 2.3% since the start of
last year. The Fed has signalled it would like to see further evidence
that higher inflation can be sustained.”